The downside of outsourcing

Apr 19th 2010

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There are many arguments for and against outsourcing. But if you ask Anna Douglas, director of finance and treasurer for the Center for Applied Linguistics (CAL) in Washington, D.C., chances are she will try to steer you away from the idea.

A few years back, the decision was made to outsource 90 percent of her organization’s finance department to India. Everything went in one swoop – accounts payable, accounts receivable, cash receipts…everything. An on-site staff of approximately 20 was reduced to two or three. How did that work out? In a frank conversation, Douglas said the results were not as expected – and not as promoted in the sales pitch.

“They don’t mention the problems that can arise,” Douglas told AccountingWEB. When you are being sold on outsourcing, she said, they talk in terms of a global economy, as though it’s a one-size-fits-all situation and the skills and processes will line up perfectly. They didn’t.

Here are some specific problems Douglas ran into when CAL outsourced its accounting department:

Training. In spite of assurances to the contrary, training for the outsourced staff was not the same as it is for U.S. employees. A chartered accountant from India does not have the knowledge and experience that a U.S.-based CPA has, said Douglas. “While the technology may be better, the quality of skill in overseas equivalents is poor at best.”

Supervision. The workforce in India did not have the ability to exercise independent judgment, so there were mistakes and a greater need for supervision. In this particular case, an MBA was hired to manage the daily processes in India, but, according to Douglas, that person barely understood what the staff was supposed to be doing.

Distance and time. “We had the daily pain of having to interpret needs long distance,” she said. And it wasn’t just the distance, it was the time difference. “They worked at night, while we worked during the day. We couldn’t talk to anyone directly. If there was a question, it had to be asked and answered by e-mail, not in real time.”

Language. The language barrier made communication difficult. After you have explained a process, there was no real way to know if the trainee understood what he or she had been told. The trainee always said, “Yes, I got it,” Douglas said. But in reality there might be no meeting of the minds at all, and no way to know that until mistakes were made. Imagine the frustration, especially for an organization like CAL, which has a stated goal of “Improving communication through understanding of language and culture.”

Security. Security was another issue. Douglas sees it as an obvious mistake to turn loose your most critical function – your finances – and send it across the world. For CAL, the checks were still printed locally in the Washington, D.C., office. But there was no ability to do rush checks or special transactions. Problems had to be dealt with over a period of many hours, through e-mail and with a language barrier.

What about cost savings?

According to Douglas, in the end, there were no real cost savings. “Keep in mind that over the long term, outsourcing costs you greater than it saves. You will end up losing the few talented individuals that you had hoped to retain. In addition, you will lose control over the very things that keeps your business going…finance.”

In spite of the bad experience CAL had with outsourcing, Douglas hesitated to completely reject it as a possibility for other companies, though she urges them to act with caution. “I don’t want to come across like outsourcing is a terrible idea,” she said. “But there are other aspects to consider. Whether you’re a decision maker or a worker, there are pieces that just don’t get explained.” In the sales pitch “…you don’t talk about how to process a check or how check processing will work, day to day,” she added.

What advice would Douglas give a company exploring the idea of outsourcing its accounting functions?

She might tell them to focus their energies instead on hiring good talent, rather than pursue the outsourcing option. But if they were determined to outsource, she would suggest they do the transition in phases.

“We sent everything out at once…and everything was a problem. Nothing was working as it should have,” Douglas said. Rather than do that, she believes it’s a good idea to send a small piece of the accounting out, like accounts payable. “Let it ride for six months and see if it works. Then send another piece.” Ask for details about how basic functions will be carried out, on a daily basis, and how problems will be handled.

If it were up to Douglas, would she outsource her department again? Though she didn’t address this point directly, it seems unlikely that she would. Since the outsourcing began, she noted, there has been much talk about bringing the accounting back in-house. “But,” she asked, without expecting an answer, “How do you do that?”